No Downturns Allowed

When the collapsed Berlin Wall revealed the collapsed socialist economies of eastern Europe the benefits of organising economies using the efficient resource allocation of the market was undisputed. Government attempts to organised the production of goods and services clearly removed incentives, lacked the directional information provided by the pricing mechanism and led down the road to stagnation destroying wealth and capital along the way. Now the the market was clearly seen as the best method all that governments had to do was simply control the market. This would be achieved by having people in charge of the key economic institutions who understand the market and could ensure that steps were taken to prevent downturns and recessions whenever these unwelcome characteristics of market behaviour reared their ugly heads.

Luckily developments in econometrics built on the the neoclassical assumptions such as rational expectations and the efficient market hypothesis meant that mathematical modeling could be done by gifted economists such as Alan Greenspan and his even more accomplished model building successor Ben Bernanke. They've been aided of course by the increases in computing power, which allowed them to model all the variables necessary to control something as complex as the global economy. These assumptions of rationality and efficiency allow all the model builders, as many banks and hedge funds also turned to their own neoclassical alumni, to find equilibriums, maximum points of value, minimum points of cost, true price of derivatives and whatever else they needed to find and predict. Naturally anyone who can predict the future and guide investment decisions accurately must also be paid handsomely and occupy high status positions. In ancient Rome they had to rely on augurs and the entrails of birds to predict the future but in the modern world of finance there are economists armed with computers.

The advantage of mathematical economics allied with computers is the product looks so complex and sophisticated that few people dare to question it even when it fails spectacularly badly as it has over the past number of years. Even when Alan Greenspan himself admits that the models, even with the simplifying assumptions, cannot capture the global economic reality, people are still turning to these same prophets to fix the problem they actually caused. The fact that these attempts by governments and rent seeking finance companies to control and predict the market are actually a market interference which makes the market inefficient and are causing market distortions seems to be lost amid the mathematics. Each time the market tries to correctly value the goods and services of the most recent past accurately, ie downward, government and central banks try to fight this process and with their actions guided incorrectly by more incorrect models they are preventing the market's righting mechanism. When no downward corrections are allowed by even more credit expansions to correct asset bubbles caused by earlier misguided credit expanisons by statist central banks is it fair to say the market doesn't work? The market is working but more slowly than it should be as it is struggling against the headwind of government intervention being guided by models that really should be on the scrap heap.